Insider's tip: how rewards credit cards end up costing you more
Steve from Brooklyn used to work for a credit card issuer and he sent Wise Bread a great tip about the hidden dangers of reward cards:
I used to work for a large credit card issuer. One thing we found is that when our users upgraded from a standard bank-issued card (e.g. no rewards or points) to a rewards card (e.g. miles, hotel points, etc.), these same users also started charging a lot more to "non-essential" items e.g. Starbuck's, bookstore, dining out, entertainment, etc.
We also found that the reverse worked if users left the reward card (where there is an annual fee) and back to a standard card with no rewards but no points.
What we generally found is that when a user has a rewards card they spend more money on non-essential items because in the back of their mind they justified it because they were getting some type of reward points. "I don't need this extra large Starbuck's but it gets me miles therefore I'll buy it."
Or "these new shoes are $200 and I don't need them but that's 200 frequent flier miles."
However, in 75% of cases, the user ended up spending more money on interest charges and fees than was the value of the rewards. Generally rewards are only worth about 1% of your total charges. So if you spend an extra $1000 a year then you get about $10 worth of rewards.
The moral to this long story is pretty simple. For personal use, ditch the rewards cards and stick to a standard no-fee bank card that gives you nothing in return. You'll end up spending less money on non-essential items and have more money in the bank.
Editor's note: Thanks Steve!